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LIVE: Google Q4 Earnings Top Forecasts

Google has a lot to prove in its fourth-quarter earnings report, due out at 1 p.m. Pacific. The key questions: Will the search giant show progress in making more money on mobile ads? And is YouTube finally making inroads into television budgets with its video ads?

Google’s third quarter was a major disappointment to investors, as shares fell 9% the next morning after the release. But because the main problem was that the Motorola Mobility acquisition added a lot of costs, analysts and advertising experts essentially said, “Never mind.” Although there were other factors as well, such as lower mobile ad prices and the costs associated with selling its bargain-price Nexus 7 tablet, they didn’t see much of a problem in Google’s core ad business.

For what it’s worth, J.P. Morgan’s estimates call for a little under $4 billion in operating profits on a little under $10 billion in net revenues, up 19%. It could be tough to get an immediate read on Google’s fourth-quarter results, though, since most analysts apparently didn’t account for Google’s plan to dispose of the Motorola Home portion of that acquisition.

* Update: The earnings are out. And it looks like the company solidly beat forecasts, particularly on profits. Check out the results below, after the earnings call highlights. Investors like what they see, as shares are up $33, or almost 5%, in immediate after-hours trading.

First up is Page, again with the odd, perhaps even more hoarse voice he had last quarter, almost a whisper. In fact, he’s a bit hard to make out at times–so here’s a handy transcript of his opening remarks from the man himself.

He notes as he did in the release that Google topped $50 billion in revenues last year. We’ve made more progress making more beautiful products, he says, such as Knowledge Graph, now in seven new languages. This is hard work.

I’m also excited on the progress we’ve made on voice search, he says. Google Maps, too, especially for Apple‘s iOS devices such as the iPhone. (You knew he couldn’t resist touting that vs. archrival Apple.)

Page also highlights Google Now, a sort of concierge that tries to anticipate what you’ll want.

We now live in a multi-screen world, he says. It’s a new kind of computing environment. It’s been a long time in computing since we had this rate of change. It’s why we put so much focus on devices–one of our biggest bets in the last few years–as well as software. You get the best of Google in one easy-to-use package.

The Chromebook, the $249 notebook, was a holiday hit, he says. Also launched two new Nexus devices, the Nexus 4 smartphone and the Nexus 10 larger tablet. Clearly there’s work to be done managing our supply better. That is a priority for the teams.

Google Play, another big bet, is “on fire,” he says. That’s all kinds of content, from music to movies.

He says Motorola is working on new opportunities in devices to get past limited battery life and fragile devices that break when you drop them.

We are only just getting started, he says. The biggest challenge is focus. We don’t want to spread ourselves too thin. But I’m quite optimistic… we will be able to grow our ambitions. That’s why I’m here, he says.

Pichette goes over the numbers, which I’ll mostly leave to the release below. One key stat: Cost per click on Google ads fell 6% from a year ago, continuing the trend of the past few quarters, but it would have been 4% if not for currency “headwinds.” And it rose 2% from the third quarter (1% on constant currency)–potentially marking a turn in its mobile ad prices.

Arora says Google is “very pleased” with revenue growth of 22%, and the ad business is “firing on all cylinders,” he says. Top 25 advertisers are on average spending more than $150 million apiece annually. Search did well, he says, especially for retail, naturally.

Product Listing Ads, Google’s new paid listing ads, quickly accounted for 15% of sales of one company, Front End Audio.

YouTube is well-positioned for the changing viewing habits of today’s multi-screen world, he says. Video is baked into the core of all our products, he adds. YouTube partner revenue doubled for the fourth consecutive year. Top 100 YouTube advertisers spent 50% more this year. Big reason: the TrueView ads that advertisers only pay for if they’re actually viewed.

We have been able to build significant new revenue streams in mobile, YouTube, and display.

Now to the analyst Q&A:

Q: What has been the major driver of continued growth rate declines on Google sites, especially given YouTube growth. Pichette: There’s quite a bit of noise because of foreign exchange. Overall, the core business is doing well, especially driven by strength in mobile. That mobile growth is having an impact on Traffic Acquisition Costs. But it’s distribution of our ads, and that’s good for our business. So nothing new here.

Q: On Knowledge Graph, how widely is it rolled out and how does it affect economics of Google’s business? Page: Still 1% of where we should be. As for economics, we provide much better answers for people. We increase the times you’ll want information, because you know you’ll get the answer. And generally, we monetize those things.

Q: Do you anticipate Google will enable people to shop right on Google rather than leave, as Product Listing Ads make people do? Page: We see tremendous uptake from advertisers and users. No specifics on the question, though.

Q: What’s the strategy with travel–providing more answers than just links to other sites. Page: Can still send people to other sites. Looking to provide related info like a human assistant might do. Google’s aspiration is to do that with any area, not just travel.

Q: Do you see Facebook’s Graph Search as competitive with Google search? Page: When we think about search, our mission has been to organize the world’s information and make it universally accessible. We’ve been doing that for awhile. Look at voice search. Then there’s Google Now. There’s tremendous innovation there. So I couldn’t feel more confident.

Q: What are potential operating losses at Motorola? Page: We’re really in the early days with Motorola. Pichette: We’ve made a lot of progress on costs. We inherited 12 to 18 months of product pipeline we have to work through. It will take time before new product efforts show results. Losses are somewhat inflated by amortization of intangibles. Still not consequential losses in context of Google overall.

Q: Any update on driverless cars and any opportunity for monetization, such as Android offering music? Page: Early days there as well. Potentially could reduce land area dedicated to cars–even Google parking spaces.

Q: What progress was made in mobile monetization? Inflection point or still need to improve? Page: Mobile is an extension of the desktop. The experiences on things like Maps are improving a lot and very, very quickly. CPCs will improve. Also trying to simplify the system for advertisers.

Q: Pace of headcount increase seems to be moderating–are there any other large-scale opportunities that would require another acceleration? Page: It’s a little bit hard to predict these things. Pichette: On capital spending, it has been really lumpy. It’s just the nature of our business. We believe now is the time to invest. Page: On hiring, it works better for our business if it’s relatively smooth. So working with recruiters to do that better.

Q: What percent of several million advertisers are bidding on mobile ads today? Arora: The vast majority of advertisers have opted into mobile. Trying to make it simple for advertisers. As for mobile landing pages by advertisers, we don’t have as many as we’d like. Page: We don’t necessarily want them to have mobile sites. Sometimes they’re too simple. Modern devices like the Nexus 4 can handle the full Web experience. Experiences should work on all devices pretty well.

Q: How many years before CPCs are equal on mobile and desktop? Page: One will always be bigger than the other. I don’t know which way. (Is that an engineer’s answer or what?)

Q: In some areas like China, can you enter them in the medium term? Arora: Not until users can get unfettered access. But users do have access in China.

Q: Will there be an impairment test related to Motorola standards-essential patents given the recent FTC deal? Pichette: Probably not.

Q: Initial thoughts and vision on Google fiber rollout and other future products? Arora: Really focused on Kansas City for now. It’s not a hobby. We should be making a good business out of this opportunity. We’re looking at expanding beyond. But it’s early. Page: The best way to predict the future is to make it, so that’s what we’re going to do.

Q: Run rate on display ad revenues? Pichette: No.

Q: How’s YouTube app on iOS doing? Arora: We’re very excited for the YouTube app on iOS, and for Maps on iOS.

And that’s all for the call.

Here are the basics from the release:

GAAP operating income in the fourth quarter of 2012 was $3.39 billion, or 24% of revenues. This compares to GAAP operating income of $3.51 billion, or 33% of revenues, in the fourth quarter of 2011. Non-GAAP operating income in the fourth quarter of 2012 was $4.27 billion, or 30% of revenues. This compares to non-GAAP operating income of $4.04 billion, or 38% of revenues, in the fourth quarter of 2011. Had we included Home, non-GAAP operating income in the fourth quarter of 2012 would have been $4.31 billion.

GAAP net income including net loss from discontinued operations in the fourth quarter of 2012 was $2.89 billion, compared to $2.71 billion in the fourth quarter of 2011. Non-GAAP net income in the fourth quarter of 2012 was $3.57 billion, compared to $3.13 billion in the fourth quarter of 2011.

GAAP EPS including impact from net loss from discontinued operations in the fourth quarter of 2012 was $8.62 on 335 million diluted shares outstanding, compared to $8.22 in the fourth quarter of 2011 on 329 million diluted shares outstanding. Non-GAAP EPS in the fourth quarter of 2012 was $10.65, compared to $9.50 in the fourth quarter of 2011.

Non-GAAP operating income and non-GAAP operating margin exclude stock-based compensation (SBC) expense, as well as restructuring and related charges recorded in our Motorola Mobile business. Non-GAAP net income and non-GAAP EPS exclude the expenses noted above, net of the related tax benefits, as well as net loss from discontinued operations. In the fourth quarter of 2012, the expense related to SBC and the related tax benefits were $700 million and $152 million compared to $536 million and $114 million in the fourth quarter of 2011. In the fourth quarter of 2012, restructuring and related charges recorded in our Motorola Mobile business were $178 million, and the related tax benefits were $65 million. In addition, net loss from discontinued operations, in the fourth quarter of 2012, was $21 million. In the fourth quarter of 2012, non-GAAP operating income with Home included the impact from Home of $35 million and excludes the above SBC expense and restructuring and related charges.

Revenues and other information – On a consolidated basis, Google Inc. revenues for the quarter ended December 31, 2012 was $14.42 billion, an increase of 36% compared to the fourth quarter of 2011.

Other Revenues – Other revenues from Google were $829 million, or 6% of total Google revenues, in the fourth quarter of 2012. This represents a 102% increase over fourth quarter 2011 other revenues of $410 million.

Google International Revenues – Google revenues from outside of the United States totaled $6.9 billion, representing 54% of total Google revenues in the fourth quarter of 2012, compared to 53% in the third quarter of 2012 and 53% in the fourth quarter of 2011.

Foreign Exchange Impact on Google Revenues – Excluding gains related to our foreign exchange risk management program, had foreign exchange rates remained constant from the third quarter of 2012 through the fourth quarter of 2012, our Google revenues in the fourth quarter of 2012 would have been $130 million lower. Excluding gains related to our foreign exchange risk management program, had foreign exchange rates remained constant from the fourth quarter of 2011 through the fourth quarter of 2012, our Google revenues in the fourth quarter of 2012 would have been $193 million higher.

And a few other important stats:

Paid Clicks – Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of our Network members, increased approximately 24% over the fourth quarter of 2011 and increased approximately 9% over the third quarter of 2012.

Cost-Per-Click – Average cost-per-click, which includes clicks related to ads served on Google sites and the sites of our Network members, decreased approximately 6% over the fourth quarter of 2011 and increased approximately 2% over the third quarter of 2012.

TAC – Traffic acquisition costs, the portion of revenues shared with Google’s partners, increased to $3.08 billion in the fourth quarter of 2012, compared to $2.45 billion in the fourth quarter of 2011. TAC as a percentage of advertising revenues was 25% in the fourth quarter of 2012, compared to 24% in the fourth quarter of 2011.The majority of TAC is related to amounts ultimately paid to our Network members, which totaled $2.44 billion in the fourth quarter of 2012. TAC also includes amounts ultimately paid to certain distribution partners and others who direct traffic to our website, which totaled $634 million in the fourth quarter of 2012.

Other Cost of Revenues – Other cost of revenues, which is comprised primarily of data center operational expenses, amortization of intangible assets, content acquisition costs, credit card processing charges, and manufacturing and inventory-related costs, increased to $3.14 billion, or 22% of revenues, in the fourth quarter of 2012, compared to $1.25 billion, or 12% of revenues, in the fourth quarter of 2011.

Operating Expenses – Operating expenses, other than cost of revenues, were $4.81 billion in the fourth quarter of 2012, or 33% of revenues, compared to $3.38 billion in the fourth quarter of 2011, or 32% of revenues.

Amortization Expenses – Amortization expenses of acquisition-related intangible assets were $289 million for the fourth quarter of 2012. Of the $289 million, $153 million was as a result of the acquisition of Motorola, of which $116 million was allocated to Google and $37 million was allocated to Motorola Mobile.

Stock-Based Compensation (SBC) – In the fourth quarter of 2012, the total charge related to SBC was $708 million, compared to $536 million in the fourth quarter of 2011.

We currently estimate SBC charges for grants to employees prior to January 1, 2013 to be approximately $2.5 billion for 2013. This estimate does not include expenses to be recognized related to employee stock awards that are granted after December 31, 2012 or non-employee stock awards that have been or may be granted.

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